Capital Gains on Stock: A Comprehensive Guide to Taxation

If you've ever sold a stock for a profit, you've likely encountered the concept of capital gains on stock. In the US, the IRS taxes these gains as ordinary income, but with a few key exceptions.

The tax rates for long-term capital gains are lower than those for ordinary income, with a maximum rate of 20% for high-income earners. This means that if you've held onto a stock for more than a year, you'll pay a lower tax rate on your gains.

To qualify for the lower long-term capital gains tax rate, you must have held the stock for at least one year. If you sell a stock within a year of buying it, the gains are considered short-term and are taxed as ordinary income.

Capital gains are profits earned from selling an asset, such as a stock, for a higher price than its original purchase price.

The Internal Revenue Service (IRS) considers capital gains to be taxable income, and it's essential to report them on your tax return.

Capital gains taxes are a crucial aspect of investing in stocks. You pay taxes on profits made from the sale of assets, such as stocks or real estate.

The tax rates for capital gains vary depending on how long you held the asset. If you held it for more than a year, you're subject to long-term capital gains tax, which ranges from 0% to 20% depending on your taxable income and filing status. Most people pay no more than 15%.

If you held the asset for one year or less, you're subject to short-term capital gains tax, which is taxed according to your ordinary income tax bracket: 10%, 12%, 22%, 24%, 32%, 35% or 37%.

There are some exceptions to capital gains taxes. Assets held in tax-advantaged accounts, such as 401(k)s or IRAs, aren't subject to capital gains taxes while they remain in the account.

Here's a breakdown of the tax rates for long-term capital gains:

High-income earners may also be subject to the net investment income tax (NIIT), which adds an extra 3.8% tax on investment income, including capital gains, for individuals with modified adjusted gross income (AGI) above certain thresholds.

Cryptocurrencies like bitcoin are taxed as "property", not as a currency, which means they're subject to long- and short-term capital gains tax rates.

The IRS considers selling or trading cryptocurrencies for another asset a taxable event, and any gain realized needs to be reported on your tax return.

You don't need a Form 1099 for a cryptocurrency transaction to report it on your tax return.

Using cryptocurrency to buy goods or services is also a taxable event because you exchanged the cryptocurrency for something.

You can use capital losses to offset other capital gains, reducing your overall tax bill. This can be a silver lining if you've incurred losses on investments.

If total capital losses exceed your capital gains, you can deduct up to $3,000 of the excess losses against other types of income, such as wages. This can provide a significant tax benefit.

Tax-loss harvesting is a strategy that allows investors to use the money they lose on an investment to offset the capital gains they earned on the sale of profitable investments. This can be done by selling an investment at a loss and then using the loss to offset gains on other investments.

You can even wait and re-purchase the assets you sold at a loss if you want them back, but you'll still get a tax write-off if you time it right. This is often done by robo-advisor firms that automate the process.

If your net capital loss exceeds your net capital gains, you can also offset your ordinary income by up to $3,000 ($1,500 for those married filing separately). This can provide additional tax relief.

Any remaining losses beyond the $3,000 deduction can be carried forward to offset future income. This means you can use the loss to reduce your tax bill in future years.

Tax rates for long-term capital gains can change, so it's essential to stay informed. Congress has the power to adjust tax laws, including those related to long-term capital gains.

The current tax law, as of 2022, taxes long-term capital gains at lower rates than ordinary income. For most of the history of the income tax, long-term capital gains have been taxed at lower rates than ordinary income.

Here's a breakdown of the current tax rates for long-term capital gains, based on filing status and total long-term gains and qualified dividends:

Note that the tax rates for long-term capital gains are adjusted each year based on the Chained CPI measure of inflation.

The current law regarding capital gains tax is quite straightforward. Under current law, short-term capital gains are taxed at the same rate as ordinary income.

Long-term capital gains, on the other hand, are taxed at lower rates. For example, if you're single and your total long-term gains and qualified dividends are between $41,676 and $459,750, you'll be taxed at a rate of 15%.

Here's a breakdown of the tax rates for long-term capital gains:

It's worth noting that the income amounts, or tax brackets, are adjusted each year based on the Chained CPI measure of inflation.

Inherited property can be a blessing, but it also brings its own set of tax implications.

The stepped-up basis rule applies to inherited capital assets, which means the cost basis is increased to the fair market value of the property at the time of inheritance.

This can result in a significant decrease in capital gains tax when the inherited property is eventually sold.

The increase in value that occurred before the inheritance, such as during the life of the decedent, is never taxed.

This can be a huge relief for families who inherit property that has appreciated significantly over the years.

The Net Investment Income Tax (NIIT) is a tax that can affect income from investments. It's levied on the lesser of your net investment income and the amount by which your modified adjusted gross income (MAGI) is higher than the NIIT thresholds.

The NIIT tax rate is 3.8%. This tax only applies to U.S. citizens and resident aliens, so nonresident aliens are exempt.

The NIIT thresholds vary based on your tax filing status, as follows:

If your income from investments pushes you past the threshold, you'll owe taxes on the excess amount. For example, let's say you file jointly with your spouse and have $200,000 in wages, but also $75,000 in net investment income from capital gains, rental income, and dividends. You'd owe taxes on the $25,000 that's past the threshold at a 3.8% tax rate, which would be $950.

To calculate your capital gain, you need to determine the sale price of your stock and subtract the cost basis. The cost basis is the original price you paid for the stock, which can be reduced by transaction costs such as brokerage fees.

The capital gain is the excess of the sale price over the cost basis. This is the amount that will be subject to capital gains tax.

Long-term capital gains tax applies to profits from the sale of an asset held for more than a year, with rates ranging from 0% to 20%. Most people pay no more than 15%.

The key is to hold onto an asset for longer than a year to qualify for the lower long-term capital gains tax rate. This can save you a significant amount of money compared to the short-term capital gains rate.

Long-term capital gains are taxed at lower rates than short-term capital gains, making it a better option for investors who can hold onto their assets for a year or more. This is why some high net worth Americans don't pay as much in taxes as you might expect.

Here's a breakdown of the long-term capital gains tax rates for tax year 2023, based on your tax-filing status and income:

Short-term capital gains, on the other hand, are taxed like regular income, with rates ranging from 10% to 37%. This means you pay the same tax rates that are paid on federal income tax.

You can use capital losses to offset other capital gains, reducing your overall tax bill. If total capital losses exceed your capital gains, you can deduct up to $3,000 of the excess losses against other types of income, such as wages.

Tax-loss harvesting is a strategy that allows investors to avoid paying capital gains taxes by selling off specific assets at a loss to offset gains. It can help to reduce your taxes by lowering the amount of your taxable gains.

If your net capital loss exceeds your net capital gains, you can also offset your ordinary income by up to $3,000 ($1,500 for those married filing separately). Any additional losses can be carried forward to future years to offset capital gains or up to $3,000 of ordinary income per year.

You can even wait and re-purchase the assets you sold at a loss if you want them back, but you'll still get a tax write-off if you time it right.